COMPANY LAW ASSIGNMENT-1

Submitted by Vineeth Stephen Register No:122022 MBA Exe

HISTORICAL BACKGROUND OF THE COMPANIES INVOLVED IN THE VEDANTA CAIRN DEAL

CAIRN Energies:

Cairn Energy plc is a global oil and gas exploration company headquartered in Edinburgh, United Kingdom. It has operational interests in Albania, Bangladesh, Greenland, India, Nepal and Tunisia and produces around 33,000 barrels of oil equivalent per day. Its largest activities are in India, where it has made more than 20 discoveries in Rajasthan, including a major oil discovery in Mangala. As at 30 June 2010 it had total proven commercial reserves of 247.4 million barrels of oil equivalent. In 2006 Cairn spun off its production interests in Western and Eastern India into a separate company called Cairn India Limited. Cairn Energy maintains a 69.9% initial interest in Cairn India. Acreage held by its subsidiary Cairn India includes the Mangala Area in Rajasthan Vedanta Resources PLC: Vedanta Resources plc is a global mining and metals company headquartered in London, United Kingdom. It is the largest mining and non-ferrous metals company in India and also has mining operations in Australia and Zambia. Its main products are copper, zinc, aluminium, lead and iron ore. It is also developing commercial power stations in India in Orissa (2,400 MW) and Punjab (1,980 MW). The company was founded by Anil Agarwal in Mumbai in 1976.[5] It was first listed on the London Stock Exchange in 2003.Subsiduary companies are Sterlite Industries (India) Ltd, Hindustan Zinc Limited, Bharat Aluminium Company Ltd, Sesa Goa Limited. ONGC: ONGC is one of the Asia's largest and most active company involved in exploration and production of oil. It is involved in exploring for and exploiting hydrocarbons in 26 sedimentary basins of India. It produces about 30% of India's crude oil requirement. It owns and operates more than 11,000 kilometers of pipelines in India. It is one of the highest profit making companies in India. Sesa Goa Limited: Sesa Goa is India's largest producer and exporter of iron ore in the private sector. For over five decades it has been engaged in the business of exploration, mining and processing of iron ore. In fiscal 2010, it produced 21.4 million tonnes and sold 20.5 million tonnes of iron ore. It is one of the low cost producers of iron ore in the world and is well placed to serve the growing demand of Asian countries

Is the commercial interest of any other company in india is affected by the transaction?? ONGC is a company which is concerned about this deal..They have concerns over the royalty.They want the government to involve and resolve the issue for them.The government go-ahead, with conditions, will have a big impact not only on Cairn India, Cairn Energy Plc and Vedanta but also Sesa Goa, Sterlite and Oil and Natural Gas Corporation (ONGC). The key change for Cairn India is on the royalty payment and the cess issues. If royalties were made cost-recoverable and Cairn India were to foot the 70 per cent share of royalty payment, Cairn India s net asset value would fall 14 per cent to Rs. 337 per share, with crude oil prices at $100 per barrel. What s more, Cairn will be reimbursing ONGC for past royalty payments made by the latter for Cairn s share. On the cess issue, Cairn India is likely to continue to foot Rs 2,500 (plus surcharge) per tonne of crude oil.

The biggest beneficiary of conditional approval to Cairn-Vedanta is ONGC. The company till now has been paying the entire royalty burden, with the 2010-11 share being Rs 1,300 crore on revenue of Rs 3,877 crore. The conditional approval and the revised agreement would see ONGC s royalty burden being reduced by around $700 million. It would add Rs 2.50 a share to ONGC s 2011-12 earnings per share of Rs 30.5. Further, it will stand to gain from recovering the past royalty payments. This is a big boost for its coming follow-on public offer.

Is SEBI a party to the dispute? Any deal involving acquisition of 15 per cent or more stakes in a listed company requires the acquirer to make an open offer for 20 per cent stake purchase from public shareholders and this offer needs to be approved by SEBI. Soon after announcing the deal to acquire up to 51 per cent stake in Cairn India, Vedanta group had sought SEBI's approval for the mandatory open offer to be made to the public shareholders of the target company Market regulator SEBI has cleared the acquisition of Cairn India by Vedanta Resources, removing a major hurdle for the $ 9.6 billion dollar deal announced about seven months ago.

After seeking numerous clarifications on the deal from acquirer over the past seven months, SEBI has issued its final observations on the mandatory open offer to be made to the public shareholders as part of the deal.

Crucial area of dispute between the parties in this deal?

The issue of royalty being paid by ONGC will be the crucial area of dispute between the parties in this deal. The key question is will the Government want to revisit the production sharing contract (PSC) for the Rajasthan field signed between ONGC, Cairn and itself. According to the PSC, the royalty cost has to be borne' by the licensee, in this case ONGC. Today, ONGC pays 100 per cent royalty, though its share in the field, as the Government nominee, is 30 per cent. Cairn holds the remaining 70 per cent and is the operator. ONGC on its part holds the view that royalty was cost recoverable, but Cairn was opposed to this view. ONGC wants to recover the statutory levy it pays from Cairn. Cairn's interpretation of the PSC is that royalty does not qualify to be part of contract costs. This clearly establishes royalty is not cost-recoverable, Cairn says. On the other hand, legal experts point out that any change in the PSC would require the consent of Cairn India Ltd's board. Therefore, if a commitment is sought from Vedanta Resources, the company proposing to buy Cairn Energy Plc's majority stake in Cairn India, then Vedanta cannot give a prior assurance on behalf of Cairn India. Further, if royalty is made cost recoverable then it would adversely affect the economic interests of the Government, as its share of profit petroleum will come down. Profit petroleum is the profit which the Government will make on sale of crude produced from the block after allowing cost recovery to the joint venture partners. The Rajasthan block has a potential to produce over 30 per cent of domestic crude oil and contribute over $30 billion to the Government by 2020 at current oil prices.

Is there any drafting omissions committed by the parties at the time of entering into the dispute which resulted in this controversy?

This follows the Oil Ministry watering down preconditions it had set for Vedanta to buy a 51% stake from UK s Cairn Energy. In a draft Cabinet note circulated for approving the deal, the ministry has almost withdrawn its precondition that Rs21,802 crore in royalty and cess paid by state-owned Oil and Natural Gas Corp (ONGC) on behalf of Cairn India on production from the Rajasthan oil fields should be equitably shared. In the first draft, the Oil Ministry had proposed to the Cabinet that approval be granted only after Cairn India agrees to equitable sharing of royalty and paying its sharing of cess However, in the note that was finally circulated to the ministries of finance, law, home, environment and corporate affairs for comments, the Petroleum Ministry has given an alternative that it will continue to legally pursue equitable sharing of royalty and cess, but will not make it a precondition for approval of the deal The note lists two alternatives. In the first, it lists out five preconditions, instead of 11 it had originally proposed to Cairn/Vedanta in January. The five preconditions include royalty being made cost recoverable, Cairn India withdrawing arbitration disputing its liability to pay cess, Cairn India obtaining partner ONGC s no-objection and Vedanta providing performance and financial guarantees, As an alternative to the precondition of royalty and cess, the ministry has suggested that government shall pursue all legal recourse for establishing its rights under the Production Sharing Contract (PSC) in the case of cess. On royalty, it shall take appropriate decision to enforce the provisions of PSC to make royalty cost-recoverable. Sources said it was unlikely that the Cabinet will go with the first option when an easier and least controversial option has been given in the second.

ONGC owns a 30% stake in the Rajasthan block, but pays royalty on the entire quantum of crude oil produced from the fields. Over the life of the field, the royalty burden works out to Rs18,000 crore, of which ONGC has to also bear Cairn s share of about Rs12,600 crore. Cairn has also disputed any liability to pay Rs2,500 per tonne cess on its 70% share of production from the Rajasthan blocks, which totals up to Rs9,202 crore for ONGC over the life of the field.